Divorce and Taxes Explained

When you are contemplating divorce, a host of issues concerning divorce and taxes will have to be properly addressed. Divorce is such an emotional decision that quite often the implications of divorce on taxes are overlooked by the spouses.

Viewed purely from the tax standpoint, one distinct advantage of marriage is that spouses can combine their incomes and file a joint tax return, leading to payment of reduced taxes. However, once a divorce takes place, the tax structure seriously changes. When the time comes to file tax returns, newly divorced people will have to decide whether to file a joint tax return or separate tax returns.

Joint Tax Return

Even after the divorce has taken place, you are eligible to file a joint return. Filing a joint return may be more advantageous than filing separate returns. Those who file joint tax returns are eligible for certain credits, deductions and exemptions. Many ex-spouses opt to file their taxes jointly for the last fiscal year during which they were married in order to save on taxes. You must bear in mind, though, that if you file jointly and your former spouse fails to discharge his/her obligations to the IRS, you can still be liable.

Separate Tax Returns

After a divorce, couples of course have the right to file their tax returns separately. It is commonly believed that filing separate returns can mean savings mostly for one party. There can also be instances when filing tax returns separately can mean a significant increase in the tax payment for either or both parties--depending on the tax bracket each one falls into. Separate filing can also get complicated if there is no agreement between the couples about how to share the money in any joint bank account.

Hypothetically speaking, if either of the spouses wishes to file separate tax returns and deliberately causes the other to suffer payment of higher taxes, the affected party can take recourse by filing a property settlement to claim compensation for the additional taxes. If the spouses choose to file separately, they are best advised to seek the help of a qualified divorce lawyer to arrive at a compromise formula that would minimize the negative financial impact on both parties.

Other Implications

The cost of divorce, including legal fees, is deemed a personal expense and, hence, not deductible. Alimony is taxable to the recipient and is deductible by the payer. However, voluntary additional payments cannot be construed as alimony.

The ex-spouse who receives child support cannot be taxed for it, and the ex-spouse who pays child support cannot deduct it. The custodial parent alone can claim the exemption for the child tax credit. If you are the non-custodial parent, you are ineligible to claim the dependent care credit. If both parents contribute 50 percent of the child’s living expenses, the custodial parent can claim the child as a dependent.

Conclusion

As the institution of marriage is held legal and binding between two people, the two spouses even after divorce are legally still responsible for any and all tax liabilities incurred.

In view of this, divorce can mean serious implications for many types of taxes. It is therefore of paramount importance that the written settlement agreement comprehensively spell out how the couple intends to handle dependency exemptions, filing status, final joint tax returns and any joint bank account.

Please bear in mind that if the tax implications are not effectively addressed in the final settlement, this can have serious repercussions on capital gains and income taxes. To avail optimum tax benefits after a divorce, you need to consult a tax specialist and your divorce attorney.

Furthermore, the divorce laws pertaining to residency requirements, grounds for legal separation, dissolution of marriage, property sharing, child custodial parentage, child support, visitation and alimony may also differ from state to state.